Monthly Archives: March 2015

A look at Fondo Alpha: an Italian REIF at a 65% discount

One of the cheapest Italian real estate investment funds is Fondo Alpha that is managed IDeA FIMIT SGR, one of the biggest players in this space with a total of 5 funds that are listed on the Italian stock exchange. Besides Fonda Alpha, they also manage Fondo Beta, Fondo Delta, Atlantic 1 and Atlantic 2. Fondo Alpha and Delta are the only two trading at a significant discount to NAV though. Fondo Alpha has an official expiry date of Jun 27, 2030 which is so far in the future that I almost immediately dropped the fund from my research list, but that would have been a bit premature since the fund has as stated goal an orderly liquidation by the end of December 2019. That’s something I can work with, and as visible it’s pretty high on my list that is based on the unleveraged discount to appraised property values:

Overview iREITs

Compared to the other funds Fondo Alpha looks pretty decent when looking at the high-level statistics. Occupancy isn’t very high at 64%, but even at this low occupancy level the properties are valued at a 6.4% gross yield and there is a minimal amount of leverage which implies that investors are effectively buying them at a 17.5% yield thanks to the 65% discount to NAV that the fund is trading at. Of course, when you start to dive a bit deeper you start to encounter the ugly sides of the story, but that is to be expected: otherwise it wouldn’t be trading at a 65% discount. As far as I could figure it out the fund has basically two problems:

  1. A large part of their portfolio is leased to the Italian government. In most countries that would be great since it should be a creditworthy counterparty who would often lease for the long-term. In Italy things are a bit different since the fund has trouble collecting their receivables. Ironically the Ministry of Economy and Finance is the biggest problem.
  2. A lot of their properties have short term leases. This might mean lower occupancy figures in the future and/or lower gross rents if new contracts are negotiated at lower rates.


In the 2014 annual report the fund provides an overview of their property portfolio that I have replicated below after throwing it through Google Translate. Far from perfect, but it should be good enough to understand the important stuff:

Fondo Alpha properties

As visible the government has mostly short-term leases while the other lessees have lease terms between 3 and 7 years. Based on property values 43.5% of the portfolio has leases that expire within one year. These properties are occupied by various government entities and represent 56% of rental income. The other half of the portfolio (ignoring unoccupied buildings) have longer term leases with an average duration around 4 years. While a 64% occupancy figure is of course not very good they were at least able to replace most of the leases that expired in 2014. Google Translate once again (emphasis mine):

As of December 31, 2014, sixty-five rental locations are present (leases and severance of employment), of which fifty-conductors related to private and twelve governments. During the year 2014 there has been a decrease of five rental locations as were signed nine new leases and simultaneously it ceased fourteen. The recesses have occurred as a result of communications in relation to both the serious reasons, that the course of the natural expiration of the contracts. They are also being finalized some negotiations aimed at the signing of four new contracts with private and public conductors.

The amount for the year 2014 of the royalties, bonuses employment and compensation by way of compensation to the Fund recognized by some wires that were contested the serious reasons legitimizing the exercise of the right of early termination, total 24 677. 490 euro, whose 64.26% is attributable to the Public Administration. The above-mentioned figure shows a decrease of 6.54% compared to the same information of 2013, equal to 26,405,521 Euros.


As already mentioned the fund has trouble collecting the money that it is owed. This wouldn’t be a surprise if you have a bunch of struggling companies as lessees, but apparently the Italian government isn’t a lot better since they represent the majority of overdue receivables:

As of December 31, 2014 the amount of loans to lessees for invoices issued, net of invoices to be issued and the debt, is € 10,134,915, noting an increase of ‘1.65% compared to the figure at 31 December 2013 amounted to EUR 9,970,103. This increase is attributable to an increase of the delinquency of the conductors public.

With reference to loans to tenants for overdue invoices over 30 days was recorded at the end of the year 2014 amounted to 8,520,259 Euros a given, a decrease of 3.88% compared to 31 December 2013 amounted to 8,864,492 euro. Of this amount, approximately EUR 5,939,709, accounting for 69.71% of the total, is attributable to the conductors of these public and, for the most part, the Ministry of Economy and Finance for a total amount of EUR 5,825,003 .

Finally, with respect to receivables from tenants for overdue invoices over 90 days, the figure at 31 December 2014 amounted to € 7,690,517, an increase of 1.54% compared to 31 December 2013 amounted to 7,573,539 euro.

The fund already has a provision of almost €5 million for bad debts. If I understand the following correctly the fund seems to have a successful track record with respect to collecting payments through the juridical system:

Continues the business of credit management promoted by the SGR, through the systematic use of coercive recovery of loans from the Fund, including by the courts. Relating to these activities of judicial recovery, it is noted that, as of December 31, 2014, the total amount of loans to tenants, both belonging to the Public Administration that the conductors private, subject to the injunction amounts to 54,056,009 Euros. Of this amount are recovered at the same date approximately 45,121,850 Euros, equal to ‘83.47% of the amount subject to legal action.


The downside of collecting payments through the juridical system is that the company incurs high costs. Paying a management fee of 1.13% sounds doable to me, especially since the fund should be liquidated in a couple of years, but mainly thanks to attorney and court costs the total expense ratio for 2012 was a whopping 5.10%:

Fondo Alpha TER


I usually don’t discuss taxes on my blog because my tax situation is probably not the same as yours, and in most cases I don’t need to worry about them because I’m effectively tax-exempt. This is not the case for Fondo Alpha and other Italian REIFs though since normal dividends are taxed at a 26% rate. Luckily – as far as I understand – dividends that are a return of capital aren’t taxed, but because Fondo’s Alpha NAV is €3679 while the par value of the shares is €2500 there is potentially a big tax liability. I don’t think it really matters though since you can buy the stock at €1254. Would be great news if liquidation payments would exceed €2500/share!

Conclusion (and other ramblings)

Fundo Alpha appears to be a mediocre real estate fund: they certainly don’t own prime property with blue-chip names as tenants. At the same time, I don’t think they are disastrously horrible, and that’s what the market is implying. With the fund trading at a 65% discount to NAV, while employing almost no leverage I think there is a ton of room for unfavorable events while still realizing a satisfactory return.

There are probably going to be properties that require further write-downs, there are probably going to be receivables that they can’t collect, you will incur management costs and other operating expenses in the meantime while it is unclear if they can liquidate before 31 December 2019. It isn’t pretty! But the current discount is HUGE and they should generate a decent amount of rental income in the meantime as well. I also expect that they will be able to monetize some part of the portfolio in the next couple of years, and some early return of capital should do wonders for the internal rate of return of this investment.

As a foreign investor in Italy, who doesn’t speak the language, I would never buy a huge position in a single fund because I’m probably at an informational disadvantage compared to the locals. At the same time, I also think this is the kind of market structure that can create opportunities. There is probably not a lot of foreign capital interested in researching illiquid Italian funds that are targeted at retail investors while those retail investors might not be willing to sink another euro in a bunch of funds that have returned approximately zero the last decade.

To be honest: there was actually a bit of foreign capital interested in this market last year. Blackstone launched a tender offer to acquire 50% + 1 share of Fondo Atlantic 1. In the end, they dropped the requirement to get a majority stake and bought 39.5% of the share capital while increasing the offer price in multiple steps from an initial €295.55/share to €335/share. The shares are now trading at €384 which represents a discount of just 19% to NAV.

A second tender offer was launched by Capstone Equities Capital for 33% of the shares of Europa Immobiliare N1. The tender offer was for €710/share, but the tender offer was not successful since just a handful of shares were tendered. Shares are currently trading at €716. The fairness opinion that was given by PWC as a response to the tender offer was, in my opinion, very interesting since it was not only based on a simple NAV evaluation, but also a DDM with a discount rate of 10 and 11 percent. Big Google Translate quote:

After analyzing the information contained in the documents made available by the Bidders, the asset management company, in respect of the management strategies and in line with the findings contained in the reasoned opinion of PWC, has reputedly NOT REASONABLE the Consideration proposed by the Bidders, as the same presents a discount of 54.5% to NAV at 30 June 2014 and does not appear in line with the findings of the DDM applied to the Business Plan 2014-2017.

In the light of the opinion expressed by PWC:

  • based on the Simple Method asset value (NAV), the net asset value of the Fund to the Reference Date amounted to € 1559.56;
  • on the basis of the Methodology DDM, the value of the portion of the Fund on the Date of Reference would be included in a range between approximately € 1,095.00 and € 1,127.00 with a discount on the value of the NAV between 27.8% and 29,8%.

Given the high discount rate used in their DDM valuation I think that the result is probably reasonable and *surprise, surprise* their result coincides with my view. These funds deserve to trade at a 20%+, and perhaps even a 30%+, discount. But if you buy them at a 50%+ discount you get a great deal as long as you have the patience to wait (at least) a couple of years.


Long Fondo Alpha, Europa Immobiliare N1 and other Italian REIFs

Senvest: invest in a great hedge fund at a big discount?

I know, I know, you are expecting a follow-up post on my Italian REIFs thesis, but a friend pressured me into looking at Senvest in the meantime. So blame him if this isn’t what you wanted to see ;). Anyway, the investment case for Senvest appears to be compelling. The company has a big investment in its own funds and a reported book value/share of CA$221 at the date of the latest quarterly report while the stock is currently trading for CA$166. This already represents a 25% discount, but the picture is probably a lot better because the main fund of the company has performed great in the subsequent five months.

NAV/share of the Senvest Partners fund increased 23.3% between 30 September 2014 and 28 February 2015. We can use this return as a crude measure to approximate the current book value per share of Senvest. Doing this gives us a book value of ~CA$272/share which implies a 40% discount. But it gets even better: those returns are measured in US$ while the company reports in CA$. With the US$ appreciating approximately 12% versus the CA$, we could be looking at a book value of ~CA$305/share and a discount of ~45%. That sounds pretty great for a hedge fund that has generated a >20% return since inception in 1997.

Figuring out if the company is a good deal at that discount should be a relative straightforward exercise. The value of their investments can be approximated by taking the current value, add a premium for estimated future alpha while applying a discount for operating costs and tax inefficiencies. The value of the business itself can be based on the amount of fees they generate. It’s a simple business model to understand, in theory…

Understanding Senvest

Unfortunately, the reported financials of Senvest are one major clusterfuck because they are required to consolidate their funds with the operating company. One of the results of the consolidation is that the management fee that flows from the funds to Senvest disappears since it is now an intra-company transaction. At the same time costs that were payable by outside investors appear on the income statement of Senvest. Economically it is of course not changing the situation: it just makes it harder to understand.

I think that the fees earned and the costs shared with outside investors are now reflected in “change in redemption amount of redeemable units”. But since the value of these units also change based on the returns of the fund it just becomes a gigantic mess. I don’t think it is possible to extract from the current financial statements the effective amount of the management fees that flow from outside investors to Senvest, nor is it possible to calculate what percentage of the incurred costs are paid by outside investors. But perhaps it’s my limited accounting knowledge that is the problem here, so if I have a reader that knows how to figure this out I’m all ears! Because what I want to know is basic: what kind of TER are you paying if you buy assets through Senvest?

Luckily the consolidation of the funds into Senvest is a new development, so we can just look at the income statement of Senvest for the year 2012 to get an idea of the costs of running Senvest. The funds lost money in 2011 and ended near the high watermark at the end of 2012, so it’s a good year to evaluate since it should represent, to some extent, fixed annual costs:

Income statement 2012

You can see the effects of the consolidation in the income statement. Total costs for running the company and the funds were CA$21,7 million and CA$3.3 million of those costs were borne by outside investors while the company also earned $2.7 million in management fees. Unfortunately (for us) those fees don’t all accrue to shareholders since the CEO of Senvest, Richard Mashaal, receives 40% of the annual fee through his ownership of the entity that acts as an advisor to the Senvest Master Fund and Senvest Israel Partners fund. This is however not visible in the above statement since it is accounted for as income attributable to non-controlling interests. So shareholders effectively only got CA$1.6 million in management fees.

If we add this all up we get effective annual expenses of CA$16.8 million of which $CA6.1 million are operating costs for the funds (interest, transaction costs and other expenses) while the remainder are the net costs of the employees running the fund. With an starting equity of CA$285 million and an ending equity of CA$359 million in 2012 that turns out to an total expense ratio of ~5.2%. You need to generate some serious alpha to overcome this hurdle!

And remember: this is in a year where the company didn’t earn, but also didn’t pay a lot of performance bonuses. When we look at 2013 there are almost CA$60 million in costs. If we adjust these costs based on the same split as in 2012 we get the following picture:

Senvest operating costs 2013

The high costs are mainly the result of the fantastic performance of their funds in 2013. The good news is that Senvest also generated CA$18 million in management fees for net yearly operating costs of approximately CA$34.8 million. During 2013 equity increased from CA$359 million to CA$630 million, which gives us an implied TER of 7.0%. A bit higher than in 2012, but it seems that the majority of the bonus payments can be netted out against the 1.5% + 20% fees that are payable by outside capital. Note that these numbers are without accounting for taxes. In 2012 and 2013 taxes accounted for respectively 1.0% and 2.5% of average equity.


Given Senvest’s track record it appears that they are worth their money since they have generated an annualized return of more than 20% since 1997. Unfortunately, the possibility that some manager is capable of generating alpha is not something I want to pay for since the base rate of this being true is extremely low. And while Senvests results sound great their strategy appears to be leveraged long, so risk-adjusted it’s probably less impressive.

When we see Senvest as an investment fund with a TER that varies between 5% and 10% the current discount suddenly looks a lot less attractive. It’s really unfortunate that they don’t have enough outside capital to generate a decent management fee that can offset their operating costs. I love buying assets at a discount, but not with this cost structure.

If you think that Senvest is capable of generating enough alpha to offset their expenses (or better) the company is probably a great investment at the current price point. Certainly could be the case! I’m not going to bet on it though.


No position in Senvest

Italian real estate: liquidating CEFs at a ~50% discount

WertArt Capital published two posts this year about Italian real-estate that I couldn’t ignore since it almost sounds too good to be true: Italy is filled with various closed-end real estate funds that are trading at a sizable discount – often around 50% – to net asset value and because of fixed maturity dates they have a solid catalyst on the horizon. That sounds pretty compelling to me, although I can imagine that not everybody has the same initial thoughts. Italy? Yak…

WertArt does a good job of providing some background on the history of the funds, and even more information can be found in this report on Italian REIFs. I have been busy compiling an overview of all the funds that are currently traded on the Italian stock exchange. Not an easy task because all the reports in Italian and I don’t speak/write Italian. Luckily Google Translate exists in this day and age. But, unfortunately, the quality of the disclosed information seems to be mediocre in many cases. In almost all reports you can, for example, find information about the development of the GDP in Japan while most funds exclusively own property in Italy. More relevant information such as rental yields and occupancy levels is often nowhere to be found.

I have decided to make this a multi-post series. Today I’ll give a brief overview of the various funds and the reason why I think they are attractive as a group, and in one or more future posts I’ll dive deeper in some individual funds and other relevant details (e.g. taxes, fees).


The table below provides an overview of the various listed Italian REIFs sorted by the “unleveraged MoS” column. This column is based on the discount to NAV, but adjusted for leverage using the following formula: “(NAV – Market cap) / book value real estate”. This gives a crude proxy by how much property values could decline before NAV is equal to the current market cap. Implicitly this values all other assets and liabilities that are part of the NAV at book value, so for funds that have significant other assets the measure might be flawed:

Overview discounts Italian REIFs

Note that the data is a mix of values originating from 30 June 2014 and 31 December 2014. All funds reevaluate the market values of their real estate biannually, but not all have released annual reports for the year 2014. I have also adjusted various figures to account for example for dividends paid after the end of the latest report, or for liquidation payments that have already been announced. But I almost certainly have missed something for a few funds!

With the average Italian REIF trading at an almost 50% discount to NAV it appears that there are plenty of bargains available and what’s great is that a lot of funds that have a low amount of leverage. Not surprisingly, these are favored by the “Unlevered MoS measure as can be seen in the corresponding LTV column. Loan-to-value is calculated by dividing the value of the real estate with the amount of mortgages outstanding. Other assets and liabilities are ignored.

Liquidation deadlines

Also visible in this table are the expiry dates of the various funds. Most funds expire in the next couple of years, but an expiry date is not a guarantee that the fund will be liquidated at that date. Real estate is an illiquid asset class, and especially in Italy transaction volumes have dropped after the financial crisis. Because of that new regulations have been adopted that allow funds to extend their maturity date by three years. Funds with a green cell in the “+3?” column have already taken advantage of this option while funds with a red cell still have this option available (perhaps I should have switched the color coding?). The maturity date can be further extended if approved by shareholders. Given that the alternative is a possible liquidation at fire sale prices I’m guessing that there is often no real choice.

Overview fund maturities

Rental yields

A big discount to NAV is, of course, great but preferably you also want to own property that is backed by cash flows. Cash flows not only allow investors to generate some income (and/or pay for management fees…) while we wait for a liquidation, but it also acts as a sanity check for the reported assets values.

Most properties appear to be valued at roughly a 7% gross rental yield which sounds reasonable to me for commercial properties. Nothing to get too excited about, but for an asset class that falls somewhere between equity and bonds on the risk spectrum that seems like a reasonable deal. A recent KPMG report about the European real estate markets also mentions yields in this range for offices. Given the large discounts that the funds trade at I don’t think it really matters what a fair yield exactly is. A fund with a 7% gross yield at a 66⅔% discount is yielding 21% at current prices. You have a lot of room for bad stuff at that price level!

Overview yields Italian REIFs

I don’t have yield information for all funds, but I guess that the trend is visible: the funds with the highest discounts often also offer the highest yields. Unicredito Immobiliare Uno is a bit of an exception, but approximately 50% of the portfolio value is concentrated in a property that is being redeveloped and not generating any income at the moment (and the occupancy figure is meaningless since it isn’t adjusted for the sale of a big part of the portfolio after the end of the period while the other numbers are adjusted). Anyway, that’s a discussion for a future post :).


Long various Italian  REIFs